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Market Outlook |Week of 5/2 – 5/6 |Sell in May and go away?

Previous Week’s Update: https://25koptionschallenge.com/market-outlook-week-of-4-18-4-22-pullback-turning-into-a-crash/

DOW drops 1000 points again. AMZN, GOOG have their single worst day since 2008!

Just the previous week, we had witnessed a massive 1000 point drop in DOW. And here we go again. On Friday, we had a another capitulation like drop across all the indices. We are setting new records where AMZN and GOOG had their single worst day since 2008! We are already in Bear Market scenarios as pointed in the Cheat Sheet (at the end of this market outlook). 

May is here. If you are a believer in Market Seasonality, you must know the popular adage “Sell in May and go away”. Well, what is left to sell? A majority of the S&P 500 companies have been cut at their knees and are trading at a significant discount. We just don’t know where the bottom is.   

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Market Moving Events next week

We got ZERO relief from the mega-cap earnings last week. And here we have the week which has the potential of really shaking up the markets. A 50 basis point hike is priced in for the next several FOMC meetings. I doubt that the Fed will pull another mean trick on the markets by doing a 75 point hike because that would be bad! I also feel that if they drop it to 25 basis points, that would not be a good thing either because no matter how much we want the Stock Market to stabilize, Inflation and Stagflation is something that really needs to be controlled before it gets out of hands.

The Mega Caps have already reported earnings.

Excellent is bad, good is terrible and bad is horrible:

Here is the cheat sheet for how companies are being rewarded by the markets this season. 

  • Report excellent earnings –  you pull back 5% – 7%
  • Slight Miss /Lower guidance – You get a 12%-18% haircut
  • Bad Earnings – You lose 40% – 50% of your market cap in a day!

All the mega-caps have already reported their earnings. And unfortunately, we had a mix bag of earnings which wasn’t good enough to lift the markets. Earnings will keep trickling in the next few weeks, but none of them have enough market moving power as last week had. You can either take a sigh of relief that the uncertainty of the Trillion Dollar companies is behind us or you can declare that we are in a Bear Market now. Choose whichever narrative suits you. 

Macro Analysis (VIX)

It feels like Chop Zone is the new Bull Market this year. We have hardly seen VIX drop below 20 this year. Unpredictable market moves have become the norm and we are back in Correction Territory. What do you do in Correction Territory? Stick to the guidance of keeping trading volume extremely low. Try to mix put spreads with call spreads (since we lack direction).

NOTE: We did an excellent job in May, mixing Call and Put spreads but April brought such a blood bath there were literally no green days making it very difficult to find good put spread ideas. 

QQQ Observations (Covering QQQ this week as SPY, DIA are moving in sync)

I have pulled up a weekly chart of QQQ going back to 1/1/2020 and highlighted important corrections including the COVID crash of 2020. Look at how prolonged the 2022 crash is. It has lasted 4 months already. A typical correction lasts between 20-30 days! The only thing that comes close to this is the 2008 crash if my memory serves right. Yes, there were other years like 2018, but even that was over in 2.5 months.

What to watch for in the coming week

  • Full Bull: (N/A) Stuff that dreams are made of.
  • Deeper Pullback : This is already history. We have already broken through the critical support at $340
  • Bear Market: We just took out the last line of defense already. With major earnings behind us, if markets react favorably to the FOMC meeting, this might be the end of the misery that 2022 has brought. On the other hand, any negative reaction to the Fed rate hikes, drops QQQ to $295-$300 range very swiftly. 

Key Takeways

  • With most significant earnings events behind us, if markets cannot recover after the FOMC meeting, all bearish scenarios will come into full effect.  
  • A bad reaction to the FOMC meeting on Wednesday will take these markets another leg lower.  
  • Portfolio Allocation: Keep trading volume extremely low (10% – 15% of account size) as long as VIX is above 22. Otherwise, you will keep getting chopped out.

CHEAT-SHEET

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